Recognizing the enormous role that businesses can play in helping solve large-scale problems, five of the world’s leading business schools have forged a unique international partnership: The Council on Business & Society.

Read this blog to obtain direct reports and gain insights into the MBA student participants’ reactions to the topics presented at the Council’s inaugural Forum.

The Paris forum held in November 2012 will bring to bear a world of expertise and research on the fundamental questions of how companies are governed and how they are led — and how that governance and leadership can better serve society, today and in the future.

A recent piece in Poets & Quants discusses survey results presented at the Council on Business & Society. The survey asked current MBAs to rank the biggest societal challenges for businesses today. Environmental protection topped the list. Survey results were presented in Paris on Friday (November 16) at the first forum hosted by the Council on Business & Society.

Speakers: Prof. Alexandra Niessen-Ruenzi , University of Mannheim, Business School;
Mr. Michael de Fabiani, Board member and Chairman of Appointments, Remuneration and Governance Committee, Vallourec

Prof. Niessen-Ruenzi started this session by providing an overview about the topic of compensation and CEO effectiveness. She answered the questions of how compensation has developed during the last years and if CEO compensation is related to competition for talent or to rent extraction discussing the reasons for high CEO compensation from an academic perspective. Evidence from the literature showed that it is not the level of pay what public cares about, but the strong increase of CEO compensation. Furthermore, the strong increase in CEO compensation relative to the average worker’s remuneration or even relative to the S&P 500 provides evidence that this is not justifiable.

She further mentioned that there exist two conflicting views: the economic view which sees executive pay as a remedy of the agency problem and the managerial power approach which sees executive pay as part of the agency problem (e.g. managers use their power to get paid a high compensation). So, on one hand – when looking at the optimal contracting issue – the literature shows that there is a strong relationship between firm size and CEO pay as the best paid CEOs manage the largest firms. However, Prof. Niessen-Ruenzi wanted to keep in mind that firm size through different companies rose over time and thus could explain part of the increase in CEO compensation levels. On the other hand – when taking into account managerial power – it is obvious that CEOs have power over the pay setting process due to economic incentives, social factors, etc. In a very interesting study about the corporate jet use, she provided an example for perks which were used for CEOs’ personal interests.

When answering the question if shareholders and the public care about CEO compensation, she referred to the introduction of say-on-pay provisions and public outrage. She came to the conclusion that shareholders don’t seem to care and that even if the public seems to be particularly angry about bonus payments, public outrage does not seem to be a mechanism which could lead to significant changes. Studies show that management decreased the criticized part of the pay and increased other types of payment leading to a different composition of compensation rather than to decreased level of compensation. The result is the decrease of pay-performance-sensitivity.

Prof. Niessen-Ruenzi’s conclusion was that there is no unified approach to explain CEO compensation and that legislation attempts (e.g. say-on-pay provisions) haven’t led to shifts in compensation policies, yet. This raised some questions of the audience as if there is a better fit to workers’ remuneration when workers are represented on the board or if there is one right way to determine the level of pay. As there is no empirical data available on this topic, Prof. Maug handed over these questions to Mr. de Fabiani to answer them as a practitioner.

Mr. de Fabiani gave back the last question by asking “What is the right price for a pair of shoes?” In his opinion there is no argument against high CEO compensation as long as it is explainable in a sense that the executives of a company are not ashamed for deciding a specific CEO compensation level. He further announced that the public focuses only on CEOs, but not on other well paid persons as for example football players. The reason for this fact is that there seemed to be the scandal that there is no correlation with the package paid when CEOs ran out of the company leaving it in bad shape. In his opinion, those packages have to be questioned as it clearly describes a “red face situation”.

His arguments for high CEO compensation were the attraction and retention of talent in an increasingly complex and global economy. This is especially the case when hiring workers from foreign countries. However, he noticed that a benchmark for compensation has to be established which should be adapted to the company situation and that there is a need for tools like sanctions which should be clearly linked to performance. Thus, transparency to all stakeholders became an important aspect as in many other sessions.

Referring to the question “Are you supporting compensation laws, such as putting a cap for a maximum or an average level of compensation?”, Mr. de Fabiani said that he would support this type of law if everybody’s remuneration is fixed, not only the CEO’s remuneration. Otherwise, he saw no reason fixing CEO compensation to a specific level.

Harsh discussions about corporate governance and the role of government have been increasing steadily from the last decade. Regulations represent multidimensional trade-offs and sometimes even end up on opposite results, since risk aversion may cause reduction on informational efficiency and market liquidity, within a disclosure regulated market, for instance. Therefore, the balance of public benefits from regulation versus its private burden demands a continued assessment over time.

We listened today to Mr. Mats Isaksson pointing the two main goals for government regulation: (i) to improve market efficiency, mainly by facilitating innovation driven corporations to raise capital, consequently creating an investor friendly environment, and (ii) to enhance stock markets proper credibility, transparency and enforceability, while they represent the epicenter for some of the most important footprint on companies. Also, Mr. Isaksson raised questions under the light of stock market inefficiencies, in particular transaction concentration resulted by index portfolio investment. Its side-effect is that it reduces liquidity for non-listed companies.

In addition, Prof. Sridar Arcot addressed widely adopted UK’s “Comply or Explain” disclosure approach, created under the assumption that compliance goes beyond one size fits all. The main goal of this approach is conferring discretion and flexibility to companies, while considering the general scenario. While being voluntary for companies, Prof. Arcot presented a selection of findings over this disclosure modality adoption landscape by companies, argued about the quality of some companies explanations and stated that there are still about 20% of companies ruled by this methodology that neither comply nor explain.

Finally, Prof. Rodrigo Bandeira de Mello presented the intricate pyramidal ownership structure some corporate groups have in Brazil to demonstrate the role played by government background board members. One of the reasons for this is that Brazilian government had historically relied on these groups as a mechanism for policy implementation, since, within the country’s scenario, he said, it is less costly. Nevertheless, Prof. de Mello affirmed that advantages created by government background board member are typically a firm “specific asset”, and contingent to the country’s institutions, not representing a monolithic formula.

To sum up, disclosure, its relevance and impacts differ accordingly to specific situations. “Comply and Explain” may fit better for the British-like business environment, that demands greater flexibility and shows high protection for minority shareholders whereas closer relationship to government may change the way Brazilian firms talk to market.

Mr. Gilles Pélisson, Former Chairman of ACCOR Group and Independent Director of Accenture, TFI, BIC and NH Hotels

Mr. Mats Isaksson, Head of Corporate Affairs Department, OECD

In the last 20 years, there has been a proliferation of codes and guidelines on Corporate Governance. This panel discussed whether this development went in the wrong direction, if there are too many codes that could harm business, and what the explicit role of the CEO is.

As a first speaker, Prof. Audia discussed CEO accountability from a wider perspective. Accountability of CEOs means being permanently scrutinized by various actors such as the board, investors or consumers; CEOs are continuously held accountable. This perspective not only underpins the role of media in this process, but also highlights possible tensions of being accountable to multiple parties with diverging interests. He also mentioned the difference of CEOs being held accountable for outcomes vs. being held accountable for processes. Finally, Prof. Audia noted that more excessive accountability pressure, partly ignited through an information explosion, can also result in counter effects and malfunctions.

According to Mr. Pélisson’s view, CEOs should primarily be accountable to the customer and focus on the product. He stressed the legitimacy of CEOs to steer the company and raised the issue of time restrictions in the process of decision making. As consensus finding in large groups can be too time consuming, the CEO needs sufficient resources to make decisions which cannot be delegated to subdivisions. As a recipe for good leadership, he mentioned being an example, fostering transparency, leveraging your employees and customers, both of whom can provide valuable information, and not limiting yourself but setting your own individual targets.

Mr. Solmssen, declaring himself not as an expert, but rather as a fact witness, shared his experience on accountability while being on the management board of Siemens for 5 years. Specifically, he reported about adverse effects using the “four-eye principle” which can result a shifting around of responsibility because two people have to approve major decisions. With an American background conspicuous about concepts like co-determination, he also mentioned his surprise of being accountable to the Workers Council – a notion that again stressed how multifaceted the concept of accountability is. Finally, in view of the huge amount of time spent on implementing risk management measures, he underlined the importance of the question which accountability mechanism actually are efficiently and effectively working.

Mr.Isaksson, while working on the revision of Corporate Governance guidelines in the OECD, has been following the Corporate Governance development over the last years. He pointed out that while focussing on shareholders and the management board, the role of the CEO as the missing link in the discussion has been underrepresented. Rather amusingly, he challenged the demonizing view of CEOs either stealing from the company or shirking on the job leading to invalid assumptions. Instead, a good CEO as the key person in the company, can compensate for a bad board, but not the other way around.

There was a discussion about whether the ability to be an effective CEO differs when working for a listed vs. non-listed company. It provoked the claim that when you have a shareholder family instead of widely dispersed shareholders, long term orientation gets a higher standing. This might be due to a stronger commitment and feeling of belonging to the company, whereas CEOs of listed companies generally tend to focus more on short-term financial numbers. Later it was added the the idea of widely dispersed shareholders fostering a low degree of control is, statistically, a myth as people are reluctant to go to the market which can be explicitly seen in a dramatic decrease of recent IPOs.

The idea was put forward to think of Corporate Governance rules not in terms of cost-benefit tradeoffs but as being complementary. The more precise the rules, the better you can navigate where you want to go, but without rules one runs the danger of getting lost.

The panel ended with a question about the most important qualities of a CEO. Despite a sound health condition, it was recommended to look at the record where these qualities been tested, such as in a crisis.

After yesterday where the conference focused on corporate governance, today we turned to the topic of leadership. To kick off the session on Accountability and its Limits, Professor Pino Audia of Tuck, noted that leadership is an important substitute as well as enforcer of governance. I thought this was a great connection – and a engaging way to begin our session which focused very much on the experiences of Siemens. Peter Solmssen, the General Council of Siemens shared with the group more details behind the Siemens corruption scandal – and the steps the firm has taken to prevent future similar situations.

In 2006, over 200 German investigators showed up at Siemen’s door to follow up on corruption charges. The potential impact on the firm was immense – while potential fines of up to €10 billion was significant – the possible debarment from competition for public contracts could be disastrous. Particularly since so much of Siemens revenue comes from public contracts. When Peter joined Siemens as General Counsel after the scandal broke, he looked closely at what were the root causes of the endemic corruption in the organization. He narrowed down on three key causes (1) pressure to make problems go away (2) complex company structures and (3) a belief in myths. I found Peter’s description of “belief in myths” to be particularly interesting. He zeroed in on falsehoods such as “everyone does it” and “you have to pay to play” as key to driving a belief that Siemens couldn’t be competitive in some markets without bribes. However, since Siemens has cleaned house, and closed the door on the scandal, their revenue growth has been strong and in-fact better than the past. Peter also noted that good corporate citizenship is critical – and the effect on employees when you’re not is corrosive.

Peter gave the group significant detail on the process Siemens went through to identify the extent of the corruption, make amends, and put in place structures to prevent similar situations in the future. Siemens reviewed 40M bank accounts, 100M documents, 127M transactions, and 1 in 5 employees helped do research on the corruption situation at some point. Siemens granted amnesty to employees below a certain level, and immediately after 125 employees with roles in the scandal came forward voluntarily. Peter noted that most wanted to discuss the corruption, they didn’t feel comfortable with it, and we’re empowered by the opportunity to clean house. Siemens was able to finish the investigation in 18 months, much faster than the average, and put into place a new management board, senior managers, and structures to ensure prevention. Ultimately though, Peter noted it was an issue of culture and that Siemens had to set the tone from the top of zero tolerance, a clean business, and a message that every person in Siemens was responsible for ensuring integrity and ethical behavior.

One of the first questions the audience asked Peter was about Siemens current performance and how the firm now approaches situations where other competitors are clearly not playing clean. Peter reiterated that revenue growth since the scandal has been stronger and that now the firm works closely with other like minded firms to set the tone in the industry. In addition, when a competition isn’t clean, Siemens withdraws from the business opportunity and moves on because the downside of acting unethically is significantly worse in the long-term than the short-term upside. The rich conversation continued intensively – ending with a final insight by Pino Audia – integrity is key and how we select CEOs and senior executives who champion this quality is a critical piece of corporate governance. #councilbusinessandsociety

Kevin Tay and Marret Arfsten, second-year students at the Tuck School of Business at Dartmouth, led an interactive session using the 2010 BP oil spill crisis as a case study for how the media impacts CEO effectiveness . By holding an interactive session, current and future business leaders could learn from each other’s perspectives.

Kevin kicked off the session by walking through the timeline of the BP oil spill crisis, focusing on CEO Tony Hayward and the statements and actions he made as the crisis evolved. One notable moment came when Hayward made his infamously unfeeling comments, six weeks after the spill:

“There is no one who wants this thing over more than I do; I’d like my life back.”

Hayward subsequently apologized on Facebook for his comments, saying he was “appalled” when he heard them on TV, and apologized to the families of the 11 men who lost their lives as a result of the accident. At this point, however, it was too late for Hayward to unwind the negative impact of his comments on the public’s perception of his leadership.

The rise of social media was also an interesting factor during the crisis. BP had its own Twitter account, @BP_America, but a parody account, @BPGlobalPR, that was set up in the wake of the controversy ended up having more than 10x the followers than BP’s official twitter handle (125K vs. 10K).

To dig deeper into how the relationship between CEOs and the media has evolved over time, Kevin challenged the group to discuss how the CEO’s reaction differed between the BP crisis in 2010 and the Exxon Valdez oil spill in 1989. The panel audience broke into small groups for 20 minutes to discuss their perspectives.

When the group reconvened, some of the ideas brought up included:

BP CEO Hayward and his team needed a crisis management plan in place, include a crisis communication strategy. Kevin showed a video of Hayward admitting after the crisis that BP was more or less improvising their response strategy from day-to-day as the crisis worsened, instead of relying on a pre-existing crisis management plan.

CEO Hayward did a good job of immediately going to the site of the accident, unlike Exxon’s CEO Rawl, who did not visit the site until three weeks after the disaster. However, Hayward could have done a much better job of expressing his dismay that the crisis happened, while still conveying that he was calm and in charge. Hayward appeared too stoic when filmed on camera, which the public translated as him being unfeeling.

Unlike the case of Exxon Mobil, in which the tanker that crashed was owned by Exxon, the damaged oil rig was leased by BP from Transocean. Despite the fact that Transocean was responsible for the explosion, the situation will go down in history as the “BP Oil Crisis”.

Building on those comments, Marret discussed how empirical research on social psychology and management applies to the BP and Exxon Mobil cases in terms of:

1. Impression Management: Efforts focused on symbolic actions

Example: Exxon Mobil takes out full-page ads in 165 newspapers to present how much work Exxon has done to repair the damage of the crisis.

The general conclusion was that in 2010, CEO Hayward faced increased media scrutiny compared to CEO Rawl in 1989, especially from social media outlets. At least partially due to this intense media attention, Hayward was pushed out of his CEO role within five months of the crisis, while Rawl stayed in his position for four years.

BP CEO Hayward and his team needed a crisis management plan in place, include a crisis communication strategy. Kevin showed a video of Hayward admitting after the crisis that BP was more or less improvising their response strategy from day-to-day as the crisis worsened, instead of relying on a pre-existing crisis management plan.

CEO Hayward did a good job of immediately going to the site of the accident, unlike Exxon’s CEO Rawl, who did not visit the site until three weeks after the disaster. However, Hayward could have done a much better job of expressing his dismay that the crisis happened, while still conveying that he was calm and in charge. Hayward appeared too stoic when filmed on camera, which the public translated as him being unfeeling.